Whistleblower provisions under the CFTC, the SEC, and the IRS Programs

By Monica P. Navarro and Zach Glaza

While similar in many respects to the False Claims Act (“FCA”), the whistleblower regimes of the Commodity Futures Trading Commission (“CFTC”), Securities Exchange Commission (“SEC”), and Internal Revenue Service (“IRS”) are unique and different from the FCAs. The differences between these regimes are rarely appreciated by counsel and certainly not understood by clients.

We are often asked by clients who are evaluating their legal alternatives under the available regulatory schemes about the differences between the whistleblower qui tam provisions of the FCA and the alternative regimes for reporting fraud available under the CFTC, SEC, and IRS programs. To that very important question, in general we can say that the CFTC law was modeled after the SEC whistleblower provision and mirrors the SEC law in many respects, with minor variations. We can also say that the IRS law shares many similarities with the CFTC and SEC schemes, but diverges in certain key areas. We can also say that sometimes a single regime is at play in a case, but sometimes all of the frameworks apply to a single fraud scheme. When the latter is the case, it is important to choose the most appropriate or advantageous regime, a decision which necessarily requires a deep comparative understanding of each, as well as the focused application of those laws to the facts of the case. To ease our clients and other fellow counsel in this crucial comparative endeavor, this white paper is a summary of the key points of each law.

Both the CFTC and SEC laws define whistleblower in as an individual who provides original information relating to possible violations of the Commodity Exchange Act^[1] or the federal securities laws for the CFTC and SEC respectively. Both definitions focus on the term individual—the CFTC and SEC whistleblower provisions explicitly state that a whistleblower must be an individual—a company or another entity is not eligible to be a whistleblower.^[2] This distinction is notable because, while the IRS whistleblower law^[3] provides for the payment of monetary awards to an individual who provides information that leads the recovery of funds, it lacks a specific prohibition against companies as whistleblowers.^[4]

The CFTC and SEC both define ‘original information’ in similar terms: information that is derived from the whistleblower’s independent knowledge or analysis that is not known to the agency from any other source besides the whistleblower and that is not exclusively derived from allegations made in an administrative or judicial proceeding, governmental proceeding, or from the news media unless that information was provided by the whistleblower.^[5] The IRS rule also uses the term original information but does not provide a specific definition; however, the Internal Revenue Manual states that information should be credible and specific^[7] and limits the information eligible for award to information that was not in the possession of the Service prior to December 20, 2006 unless the information supplemented or resubmitted after that date prompts the IRS to take administrative or judicial action that it would not have taken without the additional information.^[7]

Adherence to the submission rules for each agency is vital as deviation from the prescribed procedures may result in forfeit of potential whistleblower awards. Once again, the CFTC and SEC rules for the submission of original information are nearly identical—they require the whistleblower to submit form TCR (Tip, Complaint, or Referral) to the appropriate commission online, by fax, or by mail and require the whistleblower to declare under the penalty of perjury that the information provided is true and correct to the best of the whistleblower’s knowledge.^[8] Both agencies have an anonymous submission procedure for whistleblowers that are represented by counsel; however, in such cases the anonymous whistleblower is required to disclose his identity to the Commission prior to receiving the award (this is done for eligibility verification purposes).^[9] The IRS rule requires whistleblowers to submit their information by mailing a form to the IRS Whistleblower Office and specifically states that email or fax submission is not available.^[10] Individuals submitting information to the IRS are required to do so under penalty of perjury—this requirement precludes submissions by entities other than natural persons, anonymous submissions, or submissions by persons acting as representatives for the whistleblower. The IRS Whistleblower Office will review the form for completeness and inform the whistleblower of any deficiencies that must be addressed within 45 days or the claim is considered abandoned.

The CFTC and SEC rules state that the whistleblower may be ineligible for award if the submission of information is based on facts covered in an action initiated by another whistleblower’s original information (CFTC only), there is fraud in the submission of original information to either Commission, there is a criminal conviction associated with the information provided to either Commission, or information was acquired from a person seeking to evade the eligibility requirements of either rule.[^[11] Also, each agency provides a list of government agencies and foreign regulatory authorities whose employees are prohibited from receiving a whistleblower award—prohibited agencies vary slightly between the CFTC and SEC.^[12] It is important to note that both the CFTC and SEC exclude domestic and foreign law enforcement officers from receiving whistleblower awards;^[13] this prohibition is not echoed in the IRS rule. Both the CFTC and SEC require the whistleblower, upon the request of either Commission, to cooperate by providing additional information and testimony as needed to evaluate the original information submitted. Notably, both rules clarify that ineligibility for a whistleblower award does not preclude the whistleblower from anti-retaliation protections described elsewhere in the rules. The IRS Rule prohibits whistleblower awards to employees of the Department of Treasury as well as those who acquired the information as part of their duties as an employee of Federal, State, or local government. ^[14][15] This prohibition extends to whistleblowers who acquired original information while acting in an official capacity in a position that allowed them access to Federal tax returns or abstracts and to individuals who are required by Federal law or regulation to disclose the information or are precluded from making the disclosure. Anonymous submissions and submissions made by entities and non-natural persons are also listed as possible reasons for not processing a claim.

Confidentiality of a whistleblower’s identity is paramount to creating an incentive for people to come forward with knowledge of fraud and abuse. In general, the acts enabling the rules for each agency prohibits the disclosure of information that could reasonably reveal the identity of the whistleblower,^[16] but there are limited circumstances in which either Commission can reveal such information: where disclosure is required to a defendant or respondent in a public proceeding (the SEC includes federal court or administrative actions) that the Commission initiates or a public proceeding filed by an authority to which the Commission supplies information; in circumstances where the Commission determines that disclosure is necessary to accomplish the goals of the Commodity Exchange Act or Securities Exchange Act^[17] for the protection of consumers or investors, either Commission may disclose information to the Department of Justice, appropriate departments or agencies of the Federal Government, a registered entity or futures/regulatory authority, a state attorney general, or a foreign regulatory or law enforcement agency; and either Commission may disclose information in accordance with the Privacy Act of 1974.^[18]

The IRS rule on confidentiality states plainly that the IRS will protect the identity of the whistleblower to the fullest extent of the law and in accordance with applicable IRS code.^[19] The rule does not state any exceptions to this general claim but does concede that there are rare situations where the whistleblower is an essential witness in a judicial proceeding and divulging the identity of the whistleblower is essential to pursuing the action. In such situations the Service will consult with the whistleblower before proceeding with the action.

The CFTC and SEC rules on whistleblower immunity are in lockstep—the fact that a person is a whistleblower and may aid in a Commission investigation does not preclude the Commission from bringing an action against the whistleblower for their own association with possible violations of the Commodity Exchange Act or Securities Exchange Act.^[20] However, both agencies state that a whistleblower’s cooperation with the Commission may be considered when determining sanctions or punishments against that whistleblower.

Similarly, the IRS rule does not provide immunity to tax fraud whistleblowers, in fact, whistleblowers that “planned and initiated the actions that lead to the underpayment of tax” are subject to a reduction in their award or total denial of their award if they are convicted in that role.^[21]

Aside from being an eligible whistleblower, the CFTC and SEC require the original information to be submitted voluntarily and result in sanctions greater than $1 million.^[22] Where such sanctions are assessed, the agency does not contact the whistleblower directly, rather, the agency will publish a “Notice of Covered Action” to the Commission website; it is the whistleblower’s responsibility to monitor the website and make an award claim within 90 days of the Notice using a form designated by the agency. After all appeals are exhausted the agency will review award applications to verify eligibility before informing the whistleblower if their claim is approved or denied and what award percentage will be applicable to their claim. Awards that are approved for payment are paid from a fund financed from sanctions collected in covered actions.

Under the IRS whistleblower scheme, there are statutory requirements that determine the availability of an award: the tax, penalties, interest, additions to tax and additional amounts in dispute must exceed in the aggregate $2,000,000, and if the taxpayer is an individual, the individual’s gross income must exceed $200,000 for any taxable year at issue.^[23] Whistleblower awards eligible for this treatment will range from 15% to 30% of the collected proceeds, which includes additions to tax, penalties, and interest. If these requirements are not met the Service is authorized under § 7623(a), but not required, to pay for information that results in the government’s recovery of taxes, penalties, interest, additions to tax, and additional amounts.^[24] Claims considered under 7623(a) are given at the complete discretion of the Service and are not appealable. Additionally, information provided by a whistleblower that prevents a taxpayer from receiving a refund from the IRS is not subject to a whistleblower award. The IRS Whistleblower Office will determine whether the claim deserves treatment under 7623(b) or 7623(a) and will notify the whistleblower of the classification of the claim at which point 7623(a) claims are forwarded to the Informant’s Claims Unit and 7623(b) claims are given a claim number and an analyst in the Whistleblower Office that will monitor the claim until it is completed. Eligible whistleblower awards are paid from proceeds collected from the related action and are not paid until the tax deficiency is actually collected.

If the CFTC and SEC conditions for an award are met, the Commission will determine a percentage between 10% and 30% of the collected sanctions imposed in the judicial, administrative, or related action. If there are multiple whistleblowers associated with the same action the Commission will determine individual percentages for each whistleblower.^[25] Award determinations may be increased based on the significance of the original information provided by the whistleblower in achieving a recovery, the degree of assistance provided by the whistleblower, the programmatic interest of the Commission in deterring violations by making whistleblower awards, and the extent to which giving an award enhances the Commission’s ability to enforce the Commodity Exchange Act or Securities Exchange Act.^[26]

Award determinations may be decreased based on the whistleblower’s culpability in the matters associated with the Commission’s action including the whistleblower’s role in the violations; the whistleblower’s training, experience, and position of responsibility when the violations occurred; whether the whistleblower acted with knowledge of the violations; whether the whistleblower is a recidivist; the seriousness of the underlying fraud committed by the whistleblower (if any); and whether the whistleblower knowingly interfered with the Commission’s investigation of the violations. Additionally, the Commission will consider whether there was an unreasonable, unexcused delay in the reporting of the violations by a whistleblower who had knowledge of the relevant facts but failed to report or delayed reporting the violations until learning of a related investigation. Lastly, the Commission will assess whether the whistleblower interfered with internal compliance and reporting systems by making fraudulent statements or providing fraudulent documents to the system.^[27]

Under the IRS scheme, the Service will consider increasing a whistleblower award based on the promptness with which the whistleblower made the Service aware of the non-compliance, whether the whistleblower made the Service aware of an issue that was previously unknown or would have been difficult for the Service to detect through reasonable diligence, the level of detail with which the whistleblower submits the original information, the level of cooperation that the whistleblower provided during the trial or investigation including assistance with legal or technical issues of the taxpayer’s record, whether the whistleblower identified assets that could be used to pay the taxpayer’s liabilities and connections between transactions that were otherwise not known to the Service, and the impact of the report on the behavior of the taxpayer.^[28] Conversely, the IRS may decrease an award where the whistleblower delayed in reporting violations after learning the relevant facts, the whistleblower played a role in the tax deficiencies such as participating in or profiting from the non-compliance, the whistleblower put the enforcement action at risk by informing the taxpayer about the pending action or impeding the Service’s efforts in enforcement, or the whistleblower violated the Service’s specific instructions regarding permissible and impermissible activities. Additionally, the award may be reduced or denied if it is found that the whistleblower initiated or helped in the tax violation.^[29]

Whistleblowers who are dissatisfied with the award determinations of the CFTC, SEC, and IRS have recourse. The CFTC allows Final Orders of the Commission to be appealed to the appropriate US Court of Appeals within 30 days of the issuance of a Final Order.^[30]

The SEC process is more elaborate: after all appeals of the Commission’s judicial, administrative, or related actions are exhausted, the Claims Review Staff will review all whistleblower award claims submitted and issue its Preliminary Determination based on the criteria specified in the rule. Within 30 days of the Preliminary Determination the whistleblower may request a meeting with the Office of the Whistleblower or may request a review of the material that formed the basis of making the Preliminary Determination. To contest the Preliminary Determination a whistleblower must submit a written response and other supporting materials within 60 days of the issuance of the Preliminary Determination or, if materials were requested from the Whistleblower Office, within 60 days of when the materials were made available to the whistleblower. Failure to make a timely objection to the Preliminary Determination will result in the Determination becoming a Final Order (in the event that the Determination was a denial of the claim) or a Proposed Final Determination (in the event that the Commission recommended an award). The Claims Review Staff will review timely appeals of Preliminary Determinations before issuing their Proposed Final Determination to the Commission. The Commission, if it chooses to, has 30 days to review the Proposed Final Determination before issuing its Final Order to the whistleblower.^[31]

Under the IRS scheme, a whistleblower may only appeal determinations made under 7623(b). After the Whistleblower Office informs the whistleblower of its final determination via certified mail, the whistleblower will have 30 calendar days to appeal the determination to the US Tax Court.^[32]

In sum, there are just as many similarities as there are differences between these important regimes. Choosing between regimes or deciding to pursue multiple regimes at once is a critical decision that requires consultation with competent counsel.